The Federal Reserve, in its latest policy meeting, chose to maintain its benchmark interest rate unchanged, marking the second time it has done so in three meetings. This decision suggests a shift towards a less aggressive stance against inflation as price pressures have abated.
Furthermore, the Fed’s policymakers indicated that they anticipate a single rate hike later this year and expect their key interest rate to remain higher in 2024 compared to most analysts’ previous expectations.
At the conclusion of their latest meeting, the 19 members of the Fed’s rate-setting committee expressed increased optimism regarding their ability to successfully control inflation, bringing it down to their targeted 2% level without triggering the severe recession that many economists had feared. This optimistic outlook aligns with what economists refer to as a “soft landing.”
In their newly released quarterly projections, the policymakers shared their expectations for faster economic growth and reduced unemployment in the current year and the next when compared to their projections from three months ago. Despite anticipating robust growth, they also anticipate a continued moderation in inflation.
These expectations signal that the Fed officials believe they can achieve gradual disinflation without causing disruptions in the labor market or triggering a significant recession. As Subadra Rajappa, the head of rates strategy at Societe Generale, noted, they appear confident that they can achieve their objectives without causing major economic disruptions.
Consumer inflation in the United States has dropped from a peak of 9.1% in June 2022 to 3.7%. Fed Chair Jerome Powell emphasized the importance of further data to ensure that inflation remains on a sustainable path toward its target level. However, he indicated that the Fed is nearing the end of its cycle of interest rate hikes, and a soft landing seems plausible.
Powell stated, “We’re fairly close, we think, to where we need to get,” highlighting the Fed’s primary objective of achieving a soft landing without causing a significant economic downturn.
The latest decision maintains the Fed’s benchmark rate at approximately 5.4%, a result of the 11 rate increases implemented since March 2022. Powell noted that these earlier rapid rate hikes now allow for a more cautious approach to rate policy.
The Fed officials’ projections for next year include just two interest rate cuts, a reduction from the four cuts forecasted in June. They anticipate their key short-term rate to remain at 5.1% by the end of 2024, a level higher than it had been since the 2008-2009 Great Recession until May of this year.
Reducing the number of projected rate cuts for 2024 is a positive sign, as it suggests a decreased likelihood of an economic recession that would require multiple rate cuts for economic support.
The Fed’s approach to rate increases reflects a growing awareness of the risks associated with raising rates too high, as opposed to the previous focus on the risks of not doing enough to combat inflation.
While inflation has declined overall, certain services such as auto insurance, car repairs, veterinary services, and hair salons are experiencing faster price increases compared to pre-pandemic levels. Despite this, recent data indicates progress toward the Fed’s desired outcome: Inflation, excluding volatile food and energy prices, has posted its lowest monthly readings in nearly two years for June and July.
Several factors pose potential threats to rekindling inflation or weakening the economy. Rising oil prices have led to increased gasoline costs, potentially worsening inflation and reducing consumer spending. Additionally, the ongoing limited strike by the United Auto Workers union against major U.S. automakers could contribute to higher vehicle prices.
